Tax code changes in 2017, how will they impact you?

Dear Mr. Market:

tax1You’ve posted some very impressive performance since Donald Trump’s victory in the recent presidential election. While the debate will continue in regards to what changes will take place with the new regime in Washington D.C., individuals are contemplating how they will be impacted. What can you expect and how might you be able to make some strategic moves to take advantage of these changes? Let’s specifically look at what Trump and his team are proposing to change with the current tax laws and how it will impact your finances both today and in the foreseeable future.

With Trump in the White House and Republicans taking control over both the House and Senate, tax cuts are virtually a sure thing. Our current tax codes have individuals paying rates on a graduated level with seven brackets ranging from 10% to 39.6%. What many don’t realize is that with ‘Obamacare’ the top tax bracket pays an additional 3.8% on net investment income which brings their rate to 43.4%. Here are some key points to keep in mind as we move into 2017 and the potential changes:

  • Individual Tax Brackets: Look for a reduction to three tax brackets: 12%, 25% and 33% along with elimination of the additional ‘Obamacare Tax’. Currently qualified dividends and long-term capital gains are taxed at 15% or 20% depending on income along with the additional 3.8% previously mentioned. Expect to see the top rate remain at 20% and the additional tax for healthcare removed.
  • Estate Tax: Trump certainly did not hold back his feelings regarding the ‘death tax’ during his campaign! Currently individuals can pass up to $5,450,000 to their heirs tax-free and for a married couple it’s twice this amount. After that threshold an estate tax of 40% is imposed. Trump would like to completely eliminate the current estate tax structure and make radical changes to it.
  • Overseas Profits: Trump made no effort to hide the fact that he wants jobs and funds that have moved overseas to come back to U.S. soil. Currently billions of dollars from U.S. based companies with foreign divisions are not captured with current tax laws. Trump has proposed a 10% repatriation tax on profits derived from these companies and suggested that this charge could be paid over a 10-year period. He has stated numerous times that he expects this to drive a huge inflow of business and profits back to the U.S.
  • Business Taxes: Expect to see legislation that will cut the current rate of 35% all the way down to 15%. For those that operate as a partnership, Limited Liability Corporation (LLC) or S corporation, they could possibly see the same rate as corporations. Of all the proposals that Trump has mentioned this one could have the most profound impact with the potential of a tax rate cut from 43.4% (39.6% plus ‘Obamacare’ 3.8%) all the way down to 15%; particularly if these savings find their way back into the U.S. economy.

All of these rumored changes will not take place until 2017 so what can individuals do to prepare for their 2016 taxes? Below is a quick checklist of some year-end tax tips that everyone should be aware of:

  • Consider working with a professional: There are numerous software and service solutions available these days but with all the changes in tax codes it is prudent to consider working with a tax professional. You might pay more for this but the peace of mind it offers is worth every single penny.
  • Required Distributions: If you are required to take an RMD (Required Minimum Distribution) you have until the end of the year to complete it. The penalty for failing to do so is 50% of the amount not distributed. Also be aware that non-spousal inherited IRAs have unique distribution requirements.
  • Maximize Retirement Savings: If you have not contributed the maximum amount to your traditional IRA or pretax contributions to an employer-sponsored plan, consider doing so to reduce your 2016 taxable income.
  • Tax Harvesting: Take a moment to look at the moves made within your taxable accounts this year. If you have considerable gains consider selling positions that have losses to offset the tax liability. Also be aware of any tax loss carry forwards that you might have from previous years to manage your current taxable gains.
  • Defer Income to 2017: With the potential changes we discussed earlier many individuals might find themselves at a lower tax bracket next year. Consider pushing items like: a year-end bonus, payments for services, business and rental income into next year if possible.
  • Increase Tax Withholdings: If you are going to owe federal income tax for this year consider bumping up your withholding for the remainder of the year. This can be done with a Form W-4 through your employer.
  • Plan Ahead: Waiting until the last-minute is not a plan! Take the time to put together your tax information, know your current situation and how it might change in the future. If this is an overwhelming process for you…we would encourage you to go back to our first point and consider working with a professional!

screen-shot-2016-12-02-at-9-27-05-amThe winds of change are blowing in Washington D.C. and the impact that they could have on your personal finances could be “HUGE” or should we say “YUGE”… (pun intended)! Be aware of your current situation and how the newly proposed legislation will affect you going forward. If you find that you need help, consider asking for a referral from other professionals you currently work with. We also are here to help and encourage you to contact us at (888) 47-GUIDE or (888) 474-8433.

WILL VS. TRUST – WHAT’S THE DIFFERENCE?

Catching

Dear Mr. Market:

The stock market has been rather nasty as of late so let us switch gears and touch on a topic that most investors avoid yet need to pay more attention to. After all, what exactly happens to your investments when you’re gone? Do you actually need a living trust or would a will suffice? We reached out to Mindy Baldwin, an estate planner in Rancho Santa Margarita for expertise on this topic:

The terms “will” and “trust” come up often when doing estate planning. Many people assume that these terms mean the same thing and use them interchangeably. However, wills and trusts are different documents that are used in different circumstances.   Continue reading

Is Financial Engines right for you?

financial enginesDear Mr. Market:

If you were asked to list two or three of the largest Registered Investment Advisory (RIA) firms in the country which ones would come to mind first? You’d definitely hear many of the names associated with Wall Street and the investment industry. Names like: Merrill Lynch, Charles Schwab, Fidelity and Wells Fargo – while these are certainly large firms none of them are RIA’s. We’ve written on several occasions what an RIA is and how they are driven by their fiduciary responsibility to their clients. A simple online search of RIA’s will show that the largest firm is nearly 40% larger than any its closest competitor. It specializes in assisting individuals in managing their company retirement accounts and has become a behemoth in the investment industry. Financial Engines, Inc. has risen out of relative obscurity and is quickly becoming a household name.

Financial Engines is based out of Sunnyvale, CA, is publicly traded under the ticker symbol FNGN, and currently manages over $90 billion in assets! To put this in perspective the second largest RIA firm is Fisher Investments with assets under management of just over $50 billion. Fisher Investments is a marketing machine and if you have a portfolio over $500,000 in value, you’ve most likely received one of their post card mailings or solicitation emails.

Financial Engines, on the other hand, is a relatively young company and is the creation of some of the brightest minds in the industry that made their mark in the late 1990’s. The founders of the firm are Nobel Prize winning economist William Sharpe, Stanford Law Professor Joseph Grundfest, Attorney Craig Johnson and Jeff Maggioncalda. While the firm went through some minor growing pains, they have certainly found their target market – working with individuals and managing the investments in their company retirement plans. Continue reading

Are you allowing the “tax tail” to wag the “investment dog”?

Dear Mr. Market:Tax tail dog 1

Not only do you toy with the emotions of every investor; you also have a partner that often surprises them and hits investors where it hurts the most… their pocketbook. Making money in the stock market is great but so many forget that eventually they have to reconcile with Uncle Sam come tax time. Look for example at some investments that we have recently discussed: Under Armour (UA) and InvenSense (INVN).   If you had purchased these stocks on the first trading day of this year (1/2/2014) you would be up 58% with Under Armour and up 20% with InvenSense. These numbers are impressive and would certainly make any investor happy but what happens when they are sold? How will they impact your tax return and how much of the gain will you have to pay?

Nothing is certain except death and taxes.

                            Benjamin Franklin 

*** Before we move any further in this discussion it is important to note that we are not tax advisors. In this article we will be discussing general guidelines. Every investor’s situation is unique and deserves personal attention. If you have questions we would encourage you to talk with a qualified tax professional.

Let’s take a moment to go over some of the basics when it comes to investor tax issues. Continue reading

Building Your Financial Team – The Road to Success

Teamwork arrowDear Mr. Market:

How ‘fit’ is your financial team? Putting together a financial team to help you meet your financial goals is like building a winning sports team. Each member of your financial team needs to know what their responsibility is and what they are contributing to your financial success.   With tax-season behind us and the equity and fixed income markets experiencing volatility, now is a great time to assess your team and see if it is truly making the grade!

There is no single approach to building your team or a guide on how to assemble one. The key is the team needs to work for you, they need to give you a sense of comfort and they need to work together. Whether you work with individuals or utilize software solutions it is important that an assessment takes place so that you don’t suddenly find yourself in a hole that you need to dig out of.

In this article we will discuss how to build your “Team of Trust”. We will look at three key areas that every investor should consider: Estate Planning, Tax Planning and Financial Advice. We will discuss some key elements with each member of the team: Why? Who? What? How Much? Continue reading

Splitting Headaches: New Laws May Adversely Affect Your Living Trust

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Dear Mr. Market:

On occasion you must certainly get writer’s cramp with all of your musings about the stock market. Allow us to not only give you a break this week but to also open your eyes to something outside of investments. All the attention you give your portfolio may be hampered if you neglect a few other issues. We’ve asked a guest and expert in estate planning to contribute some important information that you should be aware of:

Your living trust might be out-of-date.

Good financial planning isn’t just about stocks, bonds and other investments, it also involves looking at a client’s entire situation, encompassing family goals, tax planning and estate planning.  When My Portfolio Guide, LLC invited me to contribute an article, I jumped at the opportunity to collaborate with them because of their commitment to understanding all aspects of their clients’ lives when implementing strategies and solutions.

For those of you who have prepared a living trust, it is important to have your estate plan reviewed from time to time as things change.  As you are probably aware, new Federal and State laws are constantly being implemented, not to mention any changes that may be occurring in your personal life.  Because of the constant evolution of your personal situation and the legal landscape in general, I encourage my clients to occasionally review their living trusts and associated documents to make sure that everything is still going according to plan.

In particular, there has been one major change which I want to make you aware of.  Many people have created AB Trusts over the past two decades.  AB Trusts are designed to protect more of a married couple’s assets from being taxed by the government upon their passing.  However, one drawback of an AB Trust is that it is relatively expensive to implement after one spouse passes away.  The AB Trust requires that the trust be divided or “split” into two separate trusts after the first spouse passes away.  This split requires the help of an attorney or a CPA to divide and administer the trust and can also give legal rights to children or other beneficiaries over a portion of the trust during the lifetime of the surviving spouse, increasing the potential for conflict.  Furthermore, the split requires the filing of additional tax returns after the passing of the first spouse.  The costs associated with an AB split are often several thousands of dollars.

The AB Trust was very popular because it Continue reading

What’s my number?? – Making sense of Financial Planning

Financial Plan #2Dear Mr. Market:

Let’s be honest… the vast majority of hard working Americans have one question in common – Will I be able to retire?  The circumstances pertaining to each individual are as different and unique as the individual themselves. The one connecting point we all have however, is to know if we are going to be able to reach our goals, whatever they might be.

Have you seen some of the commercials where an actor asks you if you know how much you need to retire? Other commercials have people carrying around a huge cut-out of a random numbers …like $1,456,298 around with them.  What’s your magic retirement number? Where should an individual go to get their many questions answered?  With few guarantees how is anyone to know if they are on track to reach their goals?

There is certainly not a lack of financial planning services and products available to consumers today.  It can actually be a bit overwhelming and frustrating for the average person.  Any Financial Plan should be viewed as a guide or a benchmark, serving as a road map to the ultimate destination.  As with other financial service offerings there are many different elements that need to be taken into consideration. Let’s take a moment to look at some of the more important ones and put it in plain English using some common phrases we are all familiar with….. Continue reading